Contract Costing: Definition & Example

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  • 0:00 What Is Cost?
  • 0:40 What Is Contract Costing?
  • 1:43 How Contract Costing Works
  • 3:10 Lesson Summary
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Lesson Transcript
Instructor: Elisa Brooks

Dr. Brooks has a PhD in Organizational Leadership, and has taught on the collegiate and high school level. Most of her educational experience is in the fields of Accounting and Business. She also has written curriculum for various colleges, and teaches Personal Financial Management to military soldiers as part of their Basic Training graduation requirement.

In this lesson, viewers will understand contract costing through a detailed description and examples of how it works. After watching this lesson, the viewer should have an idea of the basic concept of how contract costing is used.

What Is Cost?

As a customer, you likely want to see how your money is being spent. We, as consumers, sometimes feel more comfortable making a purchase or getting into a contract agreement when we have a good idea of exactly where our money is going. For instance, when purchasing a new car, it's important to understand what amenities we're getting for the price of the purchase in order to decide if the purchase is worth the amount it's selling for. Some dealerships may even provide a price breakdown on the window of the car so customers have a better idea of how certain amenities that come with a car effect the purchase price. This is similar to what takes place in contract costing.

What Is Contract Costing?

The purpose behind contract costing is to track the cost associated with a specific contract agreement between the customer and the company. Examples of companies that likely utilize contract costing include construction companies, architects, and the government. In contract costing, the company is responsible for keeping up with all the costs associated with a specific contract agreement so that the customer has a breakdown of all the charges they are being billed for.

Examples of items that a customer may want the company to breakdown in contract costing may include:

  • Labor costs associated with the department responsible for moving employees to new duty stations
  • Hours of labor in the department broken down by employee
  • Hours of vacation time
  • Regular pay
  • Bonus pay

These examples would be suitable for a company with a government contract. Another example of a company utilizing contract costing would be an architect providing the buyer with a breakdown of hours of labor, material costs, and license fees associated with building a new home.

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